What are the tax implications of settling my debts?

People often turn to debt settlement when they are struggling meet their financial obligations. While they may be successful in reducing a large portion of credit card debt, they could end up owing money to the Internal Revenue Service (IRS). Any amount of debt that is forgiven is counted as taxable income. If the amount of savings is over $600 to any one creditor, Uncle Sam will have his hand out waiting to be paid. Although you may be successful in negotiating with your creditors through debt settlement taxes may end up costing you more.

Beware of Uncle Sam

Consumers that are searching for a program to help solve their financial woes may not be aware of the tax implications. Let’s say that you owe the local retailer $5,000 and you negotiate the balance down to $2,500. Uncle Sam sees that $2,500 in savings as taxable income, which is known “discharge of indebtedness” (DOI). Every credit union, bank, lender or credit card company is legally obligated to send the consumer a 1099-C form where they must report the amount of money the person saved.

Exceptions to Taxable Savings

There are a few exceptions where DOI income is not taxable:

• The amount of debt was discharged through bankruptcy
• The discharged debt happened when the debtor was insolvent (without any assets)
• The consumer disputed the debt owed
• Any interest or fees that were forgiven is not taxable income

Beware of any debt collectors that continue collection efforts after the debt has been forgiven.

Legal Advice From An Experienced Attorney

Lawyers that specialize in debt settlement law can help guide you through the process of minimizing your bills. The government actually cancelled certain debts as a direct result of Hurricane Katrina. These matters can get quite complicated, so it’s best to consult a debt settlement attorney for advice.